In this chapter of our Annual Insurance Review 2021, we look at the main developments in 2020 and expected issues in 2021 for pensions.Key developments in 2020
In last year's Annual Insurance Review we highlighted the significant challenges faced by Self-invested Personal Pension (SIPP) operators as a key development in 2019.
Unsurprisingly, 2020 saw SIPP operators remain centre stage. In particular, in May 2020 the High Court handed down the long-awaited judgment in the case of Adams v Carey, which considered the duties and obligations of SIPP operators around due diligence in the context of a civil claim. The decision represented a rare win for SIPP operators as the Court found that the starting point for assessing a SIPP operator's compliance with the Financial Conduct Authority's Conduct of Business Rules required consideration of its contractual arrangements with its client. This more restricted view of SIPP operator liabilities was welcomed in the industry, not least as it contrasted sharply with the much more expansive view of SIPP operator duties taken by the Financial Ombudsman Service (FOS) under its jurisdiction to assess complaints on the basis of what is 'fair and reasonable'. For the moment the FOS therefore continues to represent a far more claimant-friendly forum in respect of SIPP operator due diligence issues.
There remain significant areas of uncertainly for SIPP operators, despite the Carey decision. We understand that the decision has been appealed, and it remains to be seen whether the Court of Appeal will uphold the High Court's analysis and conclusions. In addition, Carey notably did not address the issue of a SIPP operator's common law duty of care, and the standards to be expected of a reasonably competent SIPP operator. There therefore remains scope for further litigation to address this important issue in the future.
Meanwhile, FOS complaints against SIPP operators have, unsurprisingly, remained at a high level, with around 2,500 new complaints in the 12 months to September 2020. However, complaint numbers are now on a downward trend once again, having peaked at around 4000 complaints in 2018/19. In any event, the SIPP industry appears likely to keep making headlines for the foreseeable future.
Separately, in November 2020 the High Court handed down a further important judgment on guaranteed minimum pensions (GMPs) in the Lloyds Banking Group case. In the original judgment in 2018 the Court held that trustees of DB schemes had a duty to equalise pension benefits for the effect of GMPs accrued between 1990 and 1997 but left a lot of practical questions unanswered around how schemes should go about this. The Court's latest judgment gives further guidance for trustees considering the treatment of members who had previously transferred benefits to other schemes, which would not at the time have been calculated on a basis taking into account GMP equalisation. The Court's judgment provided, in essence, that trustees cannot ignore historic transfers involving GMPs but need to take proactive steps to address these. This will leave many scheme trustees wrestling with the practical difficulties of undertaking such an exercise.
What to look out for in 2021
For many years there has been a stark divide in UK pensions provision between defined benefit (DB) pension benefits and defined contribution (DC) benefits. DB schemes have generally offered high levels of security and generous benefits to members but in many cases have proven to be unsustainably expensive for sponsoring employers. In contrast, while DC schemes are far more affordable for employers, they place all of the pension investment risk upon the individual member, who may have limited ability to bear this risk and little idea of what their pension will be worth at retirement.
In order to bridge this gap, the Pension Schemes Bill, now under consideration in Parliament, proposes the creation of a third type of pension benefit. Collective Defined Contribution (CDC) schemes will combine elements of both DB and DC schemes, in an effort to create hybrid schemes that are affordable to employers while placing less investment risk upon individual members. Unlike a traditional DC scheme, money would be paid by the employer and member into a collective savings pot, containing all members' funds, rather than into a savings pot specific to the individual member. The intention is that this larger pooled investment pot would allow for more stability of investment return over time. The recent emergence of Master Trusts has already demonstrated some of the benefits of scale. CDC schemes would likely offer a target income at retirement, rather than a guaranteed income as with DB schemes, with the potential for the actual pension to be higher or lower than the target depending on investment performance.
If the proposals become law, at it appears they may well do in 2021, they are likely to represent a significant shake-up of the UK pensions industry. CDC schemes may accelerate the long-term general decline of DB schemes and may introduce new regulatory requirements, for example around CDC scheme members taking advice before transferring or accessing pensions benefits. CDC schemes are also likely to be subject to ongoing scrutiny by the Pensions Regulator, which may be granted additional powers to regulate these schemes. As ever, any such new regulatory requirements have the potential to lead to claims, complaints and regulatory interventions in the future.
Download our full Annual Insurance Review 2021 for more insights.